Mental Model: The Micawber Principle

The Micawber PrincipleIn Charles Dickens’s novel, David Copperfield, published in 1850, the eternal optimist Wilkins Micawber was known for saying “something will turn up”.  He was poor but lived in expectation of becoming rich, sometimes foolishly taking on debts due to the belief.  We have Micawber to thank for one of the most famous sayings in personal finance, often called The Micawber Principle.

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

There is a very important lesson we can take from The Micawber Principle.  That is, once your basic needs are met, it is not the absolute amount of money that matters to your personal happiness and stress levels.  It is the relative amount of the total cash coming into your household compared to the total cash flowing out of your household, which I refer to as my two levers principle.

[mainbodyad]Put another way, if you are like most men or women, you are going to be happier earning $500,000 per year and spending $200,000 per year, resulting in $300,000 in additional wealth getting added to your balance sheet, than you would be earning $10,000,000 a year and spending $12,000,000 a year, watching $2,000,000 in wealth disappear from your treasury.  This is the result of our brains being wired to project future outcomes based upon current experience.  We like to watch ourselves grow richer each year, not poorer.

Combined with the scientific knowledge that happiness from money peaks at the point you are earning 50% more than the median household in your nation, or $75,000 in the United States, we can surmise that the greatest source of financial contentment could be had by someone who was bringing home $6,250 per month, had no debts to service and thus is able to put a couple thousand dollars a month into the bank each month, growing net worth and becoming wealthier and richer with the passage of time.  Time, to this person, is a friend, not an enemy.

There seems to be a case for arguing that all man requires for happiness is to be richer than his neighbor and watching some wealth pile up each month because more comes in than goes out the door.  That threshold is far lower than most people believe.